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In the investing world, few names generate as much buzz as Cathie Wood, the founder and CEO of ARK Invest. Known for her visionary approach to investing, Wood has made significant bets on disruptive technologies that have the potential to reshape entire industries. Her latest move? A substantial investment in Tempus AI (TEM), a company that is rapidly gaining attention for its pioneering efforts to integrate artificial intelligence (AI) into the fields of medical testing and diagnostics.
Tempus AI stands out as a notable addition to Wood’s flagship ARK Innovation ETF (ARKK) and ARK Genomic Revolution ETF (ARKG), signaling the fund manager's strong vote of confidence in its future. This move aligns with Wood’s history of pioneering investments in sectors on the cusp of exponential growth.
But as with any investment, especially in the high-stakes world of AI and biotechnology, the question remains: Should you follow Cathie Wood’s lead and consider adding Tempus AI to your own portfolio? While the stock has garnered a “Strong Buy” rating, it’s also important to note that it currently trades above even the most optimistic price target on Wall Street, indicating that the market may be pricing in a level of optimism that is not without its risks.
In this article, we’ll find out whether following Cathie Wood into Tempus AI is a wise decision, or a risky bet on a stock that may already be priced for perfection.
About Tempus AI Stock
Tempus AI (TEM), a technology company with a market capitalization of about $9.7 billion, is advancing precision medicine by applying artificial intelligence practically in healthcare. With one of the world’s largest libraries of multimodal data and an operating system designed to make that data accessible and useful, Tempus offers AI-powered precision medicine solutions to physicians for delivering personalized patient care, while simultaneously supporting the discovery, development, and delivery of optimal therapeutics. The aim is to enable each patient to benefit from the treatments of those who came before by equipping physicians with tools that improve as the company collects more data.
Tempus went public at $37 just two months ago, and since then, its shares have increased by approximately 60%.
Cathie Wood Continues to Buy TEM Stock
On Aug. 26, Cathie Wood’s ARK Invest acquired 59,600 shares of Tempus AI. Moreover, Wood has recently invested more than $1.5 million in Tempus AI across two of her leading funds.
Notably, the ARK Innovation ETF holds 541,460 shares of the company, representing 0.56% of its portfolio and ranking it as the 28th largest holding in ARKK. At the same time, the ARK Genomic Revolution ETF owns 752,282 shares, constituting 3.25% of its portfolio and making it the 13th largest holding in ARKG.
Cathie Wood’s significant investment in Tempus AI underscores her confidence in the company’s potential to leverage the increasing demand for AI-powered health solutions.
And Wood isn’t the only one ramping up investments in TEM. In its 13F filing on Aug. 14, Softbank Group revealed that it had acquired a new position in Tempus AI, purchasing approximately 5.41 million shares during the second quarter. Softbank's investment in Tempus suggests that Tempus’s technology is revolutionizing the healthcare diagnostics and precision medicine industry.
Tempus AI Stock Surges After Expanding Collaboration with Personalis
On Aug. 21, Tempus AI shares soared more than 21% following the company’s disclosure in a regulatory filing that it had executed a new acquisition of Personalis shares under the terms of an investment agreement. The two companies announced an expansion of their commercial relationship on Aug. 16.
In November 2023, the companies agreed to collaborate on bringing ultra-sensitive MRD testing to the market, initiating their efforts at the recent ASCO meeting. Tempus is acting as the exclusive commercial partner for Personalis’ ultra-sensitive tumor-informed MRD product to facilitate widespread adoption in breast and lung cancers and to monitor immunotherapy across all solid tumors.
In response to a positive reaction and exceptionally high demand, the companies have decided to fast-track their initiatives under the following principal terms: Tempus will hasten its commercialization activities over the first two years, Personalis will accept a greater number of patient samples during the same period, and Tempus will invest approximately $36 million in Personalis.
“We are pleased that our early access program is proceeding well and demand is strong,” said Chris Hall, CEO of Personalis. “We believe the expansion of the relationship with Tempus will allow us to better capitalize on the opportunity.”
Notably, Tempus agreed to exercise its existing warrants to purchase 9.2 million shares of common stock at an average price of $2.00 per share, in accordance with the terms, and to acquire an additional 3.5 million shares of common stock at $5.07 per share on Aug. 16.
Following the transactions mentioned above, Tempus now holds about 19.3% of Personalis’ outstanding common stock.
Recent News for TEM Stock
On Aug. 1, Tempus unveiled a new program designed to use algorithms to identify patients more likely to test positive for actionable biomarkers, who should then undergo confirmatory testing according to clinical guidelines.
On July 30, Tempus announced the expansion of its collaboration with Remix Therapeutics, a clinical-stage biotechnology firm focused on developing small molecule therapies that modulate RNA processing to tackle the underlying causes of disease. The partnership between Remix and Tempus started with the licensing of specific, de-identified data cohorts and has since evolved into a more comprehensive, strategic alliance.
How Did Tempus AI Perform in Q2?
Tempus reported its Q2 earnings results on Aug. 6. In the second quarter of 2024, the company’s total revenue rose 25.3% year-over-year to $166.0 million, surpassing Wall Street's expectations by $5.67 million. Notably, revenue from genomics increased by 22.2% year-over-year, reaching $112.3 million in the quarter. Also, TEM reported data and services revenue of $53.6 million, marking a 32.5% increase from the same quarter last year, which includes a 40% growth in its Insights (data licensing) business.
The company also improved its gross margins in the second quarter. The non-GAAP Genomics gross margin rose to 49.4%, up from 48.9% in the same period of 2023. Additionally, the non-GAAP Data and Services gross margin increased to 72.4% in the second quarter of 2024, compared to 65.9% in the second quarter of 2023.
As an early-stage growth company, Tempus has yet to generate profits and free cash flow. Its net loss totaled $552.2 million for the quarter, primarily due to $493.1 million in stock compensation and associated employer payroll taxes related to the initial public offering. TEM posted a GAAP loss of $6.86 per share, missing the consensus estimate by $3.53. Tempus’ adjusted EBITDA improved by $12.7 million quarter-over-quarter, totaling a loss of $31.2 million.
“We continue to make great progress in deploying technology within healthcare as providers and life science companies are increasingly seeking AI solutions,” said Eric Lefkofsky, Founder and CEO of Tempus. “Given our expansive multimodal dataset, and our broad reach across thousands of connected healthcare providers, we are uniquely positioned to advance AI in diagnostics and accelerate the pace of algorithmic insights.”
It’s also worth noting that the company completed a Joint Venture Agreement with SoftBank in the second quarter, named “SB Tempus,” to introduce Tempus’ AI-driven precision medicine solutions to Japan. In August 2024, SB Tempus commenced its operations.
For fiscal 2024, management anticipates revenue to reach about $700 million, marking approximately 32% growth year-over-year. Also, the company forecasts an adjusted EBITDA loss of around $105 million, reflecting an improvement of approximately $50 million from 2023.
Is TEM Stock Overvalued?
Analysts tracking Tempus AI predict the company will report a loss of $6.51 per share in fiscal 2024, with expectations for the loss to narrow to $1.23 per share in fiscal 2025. Furthermore, analysts expect TEM’s revenue to hit $696.98 million in fiscal 2024 and project a 33.27% year-over-year increase to $928.90 million in fiscal 2025.
Assessing TEM's valuation, the company’s forward EV/sales ratio is at 15.14x, significantly exceeding the sector median of 3.76x. Also, the stock’s forward price-to-sales ratio stands at 15.16x, considerably higher than the sector median of 3.89x. This suggests the stock could be overvalued at current levels.
However, it’s worth noting that companies with exposure to AI often trade at premium valuations due to their enormous growth potential. Moreover, if Tempus can maintain its anticipated revenue growth rate of around 30% y/y in the coming years, its high valuation multiples may well be justified.
Options Market Sentiment on Tempus Stock
Looking at the option chain for September 20, 2024, the $60.00 CALL option has a bid/ask spread of $4.60/$5.30, and the $60.00 PUT option shows a spread of $8.40/$9.10. Keep in mind that the options strike is the closest to the current stock price. We can estimate the expected price movement by using the midpoint prices of these options:
8.75 (60.00 put) + 4.95 (60.00 call) = 13.70/59.23 = 23.1%
Based on current prices, the options market indicates that TEM stock could move by approximately 23% by the September options expiration from the $60.00 strike price when applying the long straddle strategy. That would place the stock in a trading range of $45.54 to $72.91.
Notably, call options at the $60.00 strike price outnumber put options by approximately 1.4 to 1, with 536 open calls compared to 378 open puts. However, at the next strike price of $64.00, there are roughly 10 times more open puts than open calls, indicating that the stock’s further upside potential may be limited.
What Do Analysts Expect For TEM Stock?
On July 9, several analysts started coverage of TEM with bullish ratings. BofA initiated coverage with a “Buy” rating and a $41 price target. By combining a patient’s molecular, clinical, and imaging data with its AI platform, Tempus provides personalized therapy decisions, which BofA analysts noted is being monetized as a diagnostic offering. Tempus has “achieved impressive scale in a short period of time” and addresses a substantial total market of at least $70 billion, BofA analysts stated in a note to investors.
Morgan Stanley analyst Tejas Savant initiated coverage of Tempus AI with an “Overweight” rating and a price target of $44. The analyst described Tempus as a “unique platform company that sits at the intersection” of healthcare and data.
JPMorgan initiated coverage of the stock with an “Overweight” rating and a $42 price target. A JPMorgan analyst informed investors in a research note that the company’s large-scale patient database, which uniquely combines clinical genomic data and has been successfully monetized, distinguishes Tempus from its competitors. JPMorgan projected an annual revenue growth rate of 33% through 2027.
Tempus AI stock has a consensus “Strong Buy” rating on Wall Street. Out of nine analysts covering the stock, six recommend a “Strong Buy,” two suggest a “Moderate Buy,” and one has a “Hold” rating. However, the stock trades at a premium to even its Street-high target price of $50.00.
The Bottom Line on TEM Stock
There’s no doubt that Tempus AI is a solid company, well-positioned to capitalize on future growth in the precision medicine market. However, I cannot recommend buying the stock at current levels, due to the limited upside potential in the near term. Therefore, I believe it would be prudent to wait for a pullback and begin building a position in Tempus AI once the stock falls below the Street-high target price of $50.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
